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Calculating the Cost of Capital


After studying this chapter, you should be able to:
LG1 Grasp the basic intuition behind calculating the cost of capital and its relationship to the investor's required return.
LG2Use the weighted-average cost of capital (WACC) formula to calculate a project's cost of capital.
LG3 Debate the firm's choices in estimating the appropriate capital component costs of equity, preferred stock, and debt.
LG4Calculate and justify appropriate weights used for WACC projections.
LG5 Clarify which parts of a firmwide WACC can be used in calculating a project-specific WACC and which parts do not apply.
LG6 Note the trade-offs implicit in using either a firmwide WACC or a divisional cost of capital approach.
LG7 Differentiate between the objective and subjective approaches to computing a divisional cost of capital.
LG8 Denote the impact that flotation costs have on capital budgeting decisions and adjust the WACC to reflect flotation costs.










Cornett: M: Finance 1eOnline Learning Center

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